XY has developed two new products, Product X and Product Y, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 20% chance that competitors will take no action, a 50% chance that they will launch a similar product and a 30% chance that they will launch a better product.
The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows:
Competitor reaction Product X Product Y No action $540,000 $620,000 Launch a similar product $320,000 $380,000 Launch a better product ($150,000) ($200,000)
Another option for XY would be to launch neither product. If it chooses this course of action there is a 60% chance that competitors will take no action and there will be no effect on the company’s profit. There is a 40% chance that competitors will launch a new product and company profits will reduce by $100,000. Required: Demonstrate, using a decision tree and based on expected value, the best course of action for the company.
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